FSDH
Research believes the Federal Government of Nigeria (FGN) needs to urgently
implement policies that will grow and diversify the revenue base of the country
to avoid imminent debt crisis. Our analysis shows that the growth in Nigeria’s
debt is higher than the growth in revenue. In addition, Nigeria has the lowest
government revenue to Gross Domestic Product (GDP) ratio at 6% among some
selected countries.

Nigeria’s
over-dependency on crude oil revenue, combined with volatility in both the
price and production of crude oil are the major reasons for sluggish growth in
government revenue. Growing non-oil revenue will require that the Nigerian
economic environment has inherent structures that can support business growth.
Such structures include adequate physical infrastructure, policies, legal and
regulatory frameworks that will make the economy business-friendly to generate
taxable profits.

Our
analysis of the ratio of the interest payment on domestic debt relative to the
FGN allocation from the Federal Account Allocation Committee (FAAC) shows that
the FGN is spending too much of its revenue to pay interest on loans. This
leaves the government with little resources to spend on critical sectors of the
economy that could support strong growth and maintain a healthy economy to
generate revenue.

The
current high interest payment relative to revenue may also increase the credit
risk of the country. Although the government has been able to meet its debt
obligations (interest and principal payments) so far, if the current situation
is not addressed, the interest rate on government loans may increase because of
the perceived elevated risk. This would also lead to higher interest rates for
private sector operators. It is important to note that the external environment
is becoming tighter than before because of the rising interest rate in the US.

The
Federal Open Market Committee (FOMC) of the US Federal Reserve increased the
Federal Funds Rate by 0.25% to a range of 2% to 2.25% on 26 September 2018.
FSDH Research predicts the FOMC will still announce another rate increase
before the end of the year. This development will increase the borrowing cost
on any new Dollar denominated loan. Consequently, borrowing in the
international market is no longer as attractive as it was before. It is
crucial, therefore, to structure the Nigerian economy to enable it to generate
revenue and rely less on borrowing to meet its basic needs.